We knew the COVID pandemic would have an impact on the markets, but one I did not anticipate was its effect on the SPAC (or “Special Purpose Acquisition Companies”) market. The boom part has been well covered, but what I wanted to describe is some of the interesting “uses” of SPAC’s and the real substitute its providing to the traditional IPO market.
What is a SPAC?
Also known as a “blank check company”, a SPAC is a company that actually is a pool of public money that is looking for a company to buy. It is similar to the private equity model in that it is money looking for an acquisition, but the money is actually public and the target “reverse merges” into the money. Essentially, it is a backdoor way of going public that can be done much quicker and with more certainty than in the traditional IPO process. All SPACs go public at $10.00 per share and have two years to find an acquisition or it returns the money to its shareholders. If you are interested in learning more, this article provides a good summary. One thing to point out there is certainly an incentive issue here in deploying capital especially when the SPAC gets close to the end of its two years.
Established SPAC’s
The first time I encountered a SPAC was when I was an investment banker working on a sales transaction for a restaurant chain. It was one path we pursued in addition to potentially both selling to private equity and even going public. At that time, SPAC’s seemed like a non-standard route to getting a deal done and ultimately we didn’t pursue it. I’d say since then I’ve been casually interested but I think the market has a bit of a stigma attached to it. However, in 2019 SPAC issuances were $13.6 billion, and 2020 year to date raises are at $12.3 billion and we are a little more than halfway through the year. Many somewhat successful companies have gone public via a SPAC recently such as Nikola Motor and DraftKings. Now, Goldman Sachs is getting in on the action, raising a $700 million SPAC and famed investor Bill Ackman has raised the largest SPAC ever ($4 billion!) to buy a “mature unicorn”. Previously, this market has experienced its ups and downs but it seems like its attracting sophisticated players.
Advantages of SPAC’s Today
There are a few interesting reasons why SPACs are hot now and why companies may want to pursue this path over a traditional IPO.
- More certainty of getting a deal done as the IPO market can be volatile.
- More certainty around proceeds.
- A less complicated negotiation.
- Potentially a cheaper cost of capital as compared to a traditional IPO.
Byrne Hobart of The Diff has a really nice breakdown of SPACs here. I recommend subscribing to his newsletter – its fantastic.
Uses for SPACs?
In getting a little more familiar with this, I have noticed three specific uses for SPAC’s that are worth highlighting.
“The Tech Public Reset”
Shift, a player in the used car market, that lets people buy, sell, and finance cars on its platform went public via a SPAC. It has a similar business model to Carvana and Vroom, who are both public companies themselves. Shift was hurt by the COVID-19 pandemic and had to make some painful moves to make it through the pandemic. The SPAC route gave it the cash runway it likely needed to continue to scale its business and make it work. Moreover, another private fundraise was probably not feasible given the pandemic and given the cuts they had to make. It was time to raise cash as quick a possible and the best way to do that was via a SPAC.
“The Stalking Horse”
I think almost everyone knows that Uber bought Postmates, but I don’t think everyone knows the other bidder was a SPAC, so in a way this IPO option via SPAC represents an interesting option to the Company accepting an acquisition offer it does not like. Ultimately, the merger with Uber will be easier for Postmates to realize its potential, but it doesn’t hurt to have other options.
“The Compelling Spinoff”
Tilman Fertitta, the owner of Golden Nugget Casinos, Landry’s, and the Houston Rockets spun off his online gaming business and is using some of the proceeds to pay off some loans taken out as a result of the COVID-19 pandemic. He will have voting control in this SPAC, but I find it interesting he would spin off a business with arguably a higher valuation and upside in the future. Perhaps he looks at Draftkings success and is seeking to capture some of that upside. In the SPAC model, you can likely execute a spinoff more quickly and at a lower cost than in a normal IPO process. I’d also point out that in a post COVID world, I’d argue online gaming is an economic substitute for going to the casino and not a complement, so perhaps he is spinning off the business which has some potential to cannibalize his core business at what he feels is an attractive valuation?
Conclusion
The SPAC market definitely is serving some purposes in this market and is growing significantly. It will be interesting to see how this market develops. As I see other interesting cases, I will flag them. I would also love some feedback on this post if you wouldn’t mind commenting.
